QUANTITY THEORY OF MONEY Meaning: * Doub, Half the quantity of money an \d other things he: before and value of money doubler NIMES being equa Price will be one half of what they Two types of approaches: ( gj Cash transaction approach: Fisher equation of exchange- PT=My or P=MWT. M= Quantity of money T = Total amount of transaction (total trade or amount of goods & services to be exchanged ) V = Number of times a unit of mone; used five times for exchange of goods ani considered. As (5) 'y changes hands during a year E.g If single rupee is di services during a year then its velocity will be Validity through an example: Assumptions: 1. There will be full employment of the resources to produce goods & services. 2. Velocity of money depends upon the taste and habits of people which will remain unchanged Criticism by Keynesian Economists: 1. Output will not be constant in long run, “ “Scanned with CamScanner eee7 sification — With increase in supply of money interest rate will fall and with more noney producers will increase their capacity to produce by finding di n available to them, y finding different alternatives Les 2. Velocity will not be constant in short run, Justification - With i i as sy = increase in supply of money people ty to hold extra money which Eee velocity of money in circulation which offsets the effect on prices of ‘goods and services with increased supply of money Cash balance Approach (Marshall, Pigou & Keynes) tum of exchange function only It focuses on store of value function of money rather than medi {f nominal income in form of (fisher). According to it people would like to hold a proportion of money (Cash balances). They assume it In equation form : Md=kPY Y= Real National Income (aggregate output) P= Price of goods and services Md = Money demanded In order to achieve equilibrium Md = (Quantity of money supplied) Therefore ,M= «PY OrP=1/k. MIY Validity through an example: Assumptions: 1. There will be full employme 2. Proportion of nominal people kept in o nt of the resources to produce goods & services der to fulfil their needs will remain constant Criticism : 1. Output will not be constant in long run. Scanned with CamScannerJustification — With increase in supply of money interest rate will fall and with more money producers will increase their capacity to produce by finding different alternatives available to them. 2. K will not constant in long run. Justification - proportion of money people want to hold changes in the long run when they see the prices are going high Similarity between both approaches: 1. Both assumed employment of resources to their full capacity. 2. Velocity and k are two sides of same coin. Scanned with CamScanner